The pop superstar's second album 'Future Nostalgia' is among the records in contention for the prestigious Album of the Year prize.
Dua admitted the honour feels ''surreal'' because she didn't think she was ''cool enough'' for the nod.
She said: ''My manager Ben called me on the phone when i was in New York and told me I was shortlisted for the Mercury Prize and I couldn't believe it.
''I never really thought that would ever happen for me so I am really excited to have been shortlisted and for the recognition.
''The support means so much to me and it's kind of surreal because maybe I just didn't think I was cool enough.''
Grime megastar Stormzy is nominated for 'Heavy Is The Head' and Charli's DIY isolation record 'how i'm feeling now' is also in the running.
Charli admitted she feels ''honoured to have her ''little corner of experimental pop recognised''.
Also up for the prize is Laura Marling - who has previously been shortlisted in 2008, 2010 and 2013 - with her acclaimed LP 'Song For Our Daughter'.
She told BBC Radio 6 Music's Lauren Laverne: ''I feel very happy and pleased.''
Rockers Sports Team's debut album 'Deep Down Happy' has also received the nod, and they've been celebrating ever since they found out.
Rapper Kano's powerful LP 'Hoodies All Summer', Anna Meredith's 'FIBS', Georgia's 'Seeking Thrills', Lanterns On The Lake's 'Spook The Herd' and Moses Boyd's 'Dark Matter' will also go head-to-head.
Michael Kiwanuka's self-titled LP 'Kiwanuka' rounds off the 12 albums selected by a panel of artists and music industry professionals, including Anna Calvi, Annie Mac, Supergrass' Gaz Coombes, Jamie Cullum and Jorja Smith.
The 2019 Mercury Prize went to Dave for his acclaimed debut LP 'Psychodrama'.
The rapper beat off stiff competition from The 1975, IDLES, black midi, Foals, Fontaines D.C., Little Simz, NAO, Anna Calvi, Cate Le Bon, SEED Ensemble, and slowthai.
The 2020 Hyundai Mercury Prize shortlist is:
Laura Marling - 'Song For Our Daughter'
Dua Lipa - 'Future Nostalgia'
Porridge Radio - 'Every Bad'
Sports Team - 'Deep Down Happy'
Kano - 'Hoodies All Summer'
Anna Meredith - 'FIBS'
Georgia - 'Seeking Thrills'
Lanterns On The Lake - 'Spook The Herd'
Moses Boyd - 'Dark Matter'
Charli XCX - 'how i'm feeling now'
Stormzy - 'Heavy Is The Head'
Michael Kiwanuka - 'Kiwanuka'
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